FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS AND MANAGEMENT 1
TOPIC OBJECTIVES: At the end of the lesson the
students should be able to:
1. Understand a business relative to types and
forms;
2. Know the introductory background of
accounting;
3. Determine the bookkeeping process;
4. Define and classify the bookkeeping elements &
account titles;
5. Understand business transactions, terminologies
and effects;
5. Determine the rules of debits and credits
6. Accounting cycle
7. Familiarized Journalizing, Posting, Trial Balance,
Adjusting Entries, Prepaid Expenses, Unearned
Income, Accrued Expenses, Depreciation in
Accounting
8. Prepare worksheet and Financial Statements
9. Compute Financial Ratios
UNDERSTANDING A BUSINESS:
Business - is a venture or any establishment
with the purpose of earning profits, improve
economic standards and provide economic
stability.
TYPES OF BUSINESS
1. Service Business
2. Trading or Merchandising Business
3. Manufacturing Business
4. Investment or Finance Business
5. Hybrid Business
TYPES OF BUSINESS
1. Service Business - a type of business which principal
undertaking is the selling of one’s expertise or skill for a
fee.
2. Trading or Merchandising Business - a type of
business that buys and sells products in the same form.
3. Manufacturing Business - a type of business that buys
raw materials and produces a new product to the
market.
4. Investment or Finance Business - a business that
invest, lends and collects money with interest.
5. Hybrid Business - any combination of two or more
types of business.
FORMS OF BUSINESS
1. Single Proprietorship - a business organization
owned by only one person.
2. Partnership - a business organization owned by
two or more persons who contribute property or
service into a common fund.
3. Corporation - a business organization whose
common fund or capital is divided into shares or
stocks. The owners are called incorporators or
stockholders.
Introductory Background of Accounting
Accounting is:
the language of business
the process of collecting, analyzing and reporting
information in monetary terms reflecting the financial
condition of a business enterprise.
USERS OF ACCOUNTING
management of the business
owners of the business
creditors
government agencies
customers
labor unions
USERS OF ACCOUNTING
Management of the business - uses accounting
information for planning and controlling business
operations to maximize profits.
Owners of the business - rely on accounting
information whether to retain, sell or add
investments in the business.
Creditors - determine whether the business has
the ability to pay its obligations.
USERS OF ACCOUNTING
Government agencies - determine tax due,
whether companies are operating within regulatory
requirements.
Customers - interested in company’s strength as an
indicator of product warranties, maintenance and
support.
Labor unions - rely on companies financial
statements in negotiating higher wages and better
benefits.
ACCOUNTING AS A COURSE
Today, the course, B.S. (Bachelor of Science)
Accounting offered in many colleges and universities
is considered to be taken for a 4 years (some include
summer classes)
To be an accountant, one must study and complete the
following major subjects: Accounting, Law, and
Taxation
Afterwards is required to take and pass the
Government Licensure Examination which is prepared
by the Professional Regulations Committee (PRC)
ACCOUNTING AS A COURSE
Once passed, one is considered as Certified Public
Accounting (CPA) and can fully do his duty as an
accountant.
The Philippine Institute of Certified Public Accountants
(PICPA) is a professional organization tasked by the
government to oversee all accounting practices.
All accounting practices are formed through the
Accountancy Standard Commission (ASC)
PROFESSIONS IN ACCOUNTING
There are many opportunities after one is certified public
accountant or CPA. There are four (4) fields which an
accountant can be employed.
1. Public accounting
2. Private accounting
3. Government accounting
4. Accounting education
1. Public accounting - a CPA that offers
accounting services to the public for a fee.
Auditing - a CPA evaluates, examines and expresses his opinion
regarding the employers business enterprise through their fairness
of the financial statements.
Management Advisory Service - a CPA focuses on a business
accounting system where he designs, installs and improves, if
necessary.
An accounting system generally includes areas on financial
planning, budgeting, forecasting and inventory control.
Tax Services - giving of advice to certain financial decisions and
preparing of income tax return and representing clients to the
Bureau of Internal Revenues or BIR for tax audit
2. Private accounting - accounting performed in
private business enterprises.
Financial accounting -one is to identify and record
business transactions to come up with the different
financial statements.
Cost accounting -this deals with controlling,
determining and controlling cost in producing a certain
product or service.
Budgeting- this provides businesses with a plan for
future operations by summarizing reports and comparing
accomplishments with the plan provided.
3. Government accounting - accounting where
one accumulates different business’ accounting data
and check and audit income, payroll and tax returns
submitted by the government.
4. Accounting education - education in
accounting in various colleges and universities.
Processes involved when dealing with transactions:
1. Recording
2. Classifying
3. Summarizing
4. Interpreting
Bookkeeping Process - accounting cannot exist without
Bookkeeping. Bookkeeping is simple the recording phase of
Accounting. Without this, a business will have a hard time
dealing with the numerous transactions it faces everyday.
1. Recording - technically bookkeeping. Business
transactions are recorded systematically and
chronologically in the proper accounting books. The
double entry bookkeeping is adopted as we follow a
two-fold effect in transactions which is expressed
through debits and credits.
2. Classifying - after a period, accounting data are
summarized and presented as financial statements.
These are reported then to management for the next
process.
3. Summarizing - transactions are sorted and
grouped according to their bookkeeping elements.
This is important and useful for the need of
management.
4. Interpreting - financial statements are technical
in nature; therefore an accountant’s interpretation is
needed. This is where analysis of accounting data is
made as for management to come up with decisions
for the business.
5 MAJOR ELEMENTS IN BOOKKEEPING
ASSETS
LIABILITIES
OWNER’S EQUITY
INCOME
EXPENSES
ASSETS - are the sources controlled by an entity as a
result of past events and from which future economic
benefit are expected to flow to the entity
Cash
Accounts receivable
Notes receivable
Interest receivable
Merchandise inventory
Office supplies
Store supplies
Prepaid (expenses)
Land
Building
Office equipment
Store equipment
Furniture and fixture
Accumulated depreciation-
asset
Cash - currency on hand and money in banks
under the name of the company.
Accounts receivable - amounts or claims from
clients or customers resulting from services
rendered by the company or by sale of
merchandise.
Notes receivable - amounts or claim from clients
or customers which are expressed in writing like
promissory notes.
Interest receivable - interest already earned but
not yet been collected.
Merchandise inventory -goods or merchandise
on hand and available for sale.
Office supplies - supplies for office use.
Store supplies - supplies for store use.
Prepaid (expenses) - advance payments for certain
services. Considered as a mixed account for its
shares values that of an asset and expense
account.
Land - ground area used in the operation of the
business.
Building - structure used or occupied by the
business.
Office equipment - equipment for office use such
as typewriters, calculators, and computers.
Store equipment - equipment for store use such
as weighing scales, cash registers, freezers used
by the business.
Furniture and fixture - cabinets, tables, chairs,
and light fixtures in the building.
accumulated depreciation-asset - a contra-asset
account that aids in determining the net worth of
business assets.
LIABILITIES - are debts or financial obligations of the
business which usually must be paid on a specific date.
Accounts payable
Notes payable
Taxes payable
Interest payable
Rent payable
Salaries payable
Unearned (income)
Accounts payable - amounts owed to creditors for
purchase of goods or services received.
Notes payable - amounts expresses in written
promise to pay the creditor on a specified date.
Taxes payable - amounts due to the government like
sales taxes and income taxes.
Interest payable - interest already incurred but not
yet been paid.
Rent payable - rent already used but not have been
paid.
Salaries payable -employees’ amounts for services
done but not yet been paid.
Unearned (income) - amounts received in advance
before services are rendered.
OWNER’S EQUITY -these refer to the owners
interest in the business which consists of the
invested capital and results of operations
whether gain or loss.
Owners Name, Capital - amounts of contributions
of the owner to the business.
Owners Name, Drawing - amounts withdrawn by
the owner from the assets of the business for
personal use.
INCOME - are the different services rendered to
customers over a given accounting period.
Service income/Service fees/Service Revenue -
refers to services rendered to customers.
Interest income - refers to interest earned whether
received in advance or as realized and/or not yet
received.
Rent income - refers to services of offering office
space for clients.
Commission Income - refers to services done
through commission or percentages.
EXPENSES - are the different cost rendered for
the different use of a certain services offered to
the business.
Salaries expense
Taxes expense
Utilities expense
Advertising expense
Rent expense
Depreciation expense
Interest expense
Office/Store Supplies expense
Salaries expense - refer to compensation or
remuneration in whatever form to employees.
Taxes expense - refers to taxes and licenses due to
the government.
Utilities expense - refers to the cost of electricity and
water used in the ordinary course of business.
Advertising expense - cost to promote certain
services and product of the business.
Rent expense - cost of the used of office space in a
given period.
Depreciation expense - allocated cost of fixed
assets in a current period.
Interest expense - interest that has been already
considered in a period.
Office/Store Supplies expense - to consider if
supplies has been used up.
Understanding Transaction
Transactions are:
Records to business. They would like to answer the
following:
To know the progress of business: Profit and
Loss?
To recall events
To record events occurring in business
As required by Government
Financial events occurred in business
Exchange of values occurs between two parties.
POINTS TO REMEMBER
When dealing with business transactions:
a business is treated as a separate entity and not one
with the owner and vise-versa (Principle of Entity)
Personal transactions of the owner should not be
mixed with that of the business.
Separate records are maintained and prepared for each
business enterprise.
Always deal business transaction on the point of view
of the business
IN OTHER WORDS... NEVER MIX BUSINESS
TRANSACTIONS WITH PERSONAL TRANSACTIONS
Terminologies used in Transactions
Before identify each value received and value parted
for each terminology one must consider this in
understanding any transaction.
INVEST(ED) - received an asset and parted contributions to
the business.
BOUGHT/PURCHASE(D) - gave away cash in exchange for
an item whether service (expense) or product (asset).
RENDER(ED) - gave away SERVICE (income) in exchange
of any value.
BILLED - gave away SERVICE (income) without receiving
money
On CREDIT/On ACCOUNT - received any VALUE
without paying any amount. It could also be used if
the business did not receive the money for service
done. Same effect of “billed”
COLLECTED - received cash for transaction “billed”
or “on credit/on account”
PAID - gave away cash for different services
received. It could also mean clearing business’ debts
WITHDREW/WITHDRAW(N) - owner receives cash
as the business parted cash for personal use.
Prepare a journal entries of the ff.:
1. Nov. 10 Mrs. Roy started business with 60,000
2. Nov. 11 Bought furniture from Modern Furniture for
10,000
3. Nov. 12 Purchased goods for cash 15,000
4. Nov. 16 Sold goods for cash 15,000
5. Nov. 17 Purchased sationery for 1,000 on account
6. Nov. 19 Bought machinery for 6,000
7. Nov. 22 Withdrew from bank for personal use 3,000
8. Nov. 27 Paid electricity bill for 100
9. Nov. 29 Cash sales for 6,000
10.Nov. 30 Commission received 5,000
Effects of Business Transactions - these are the
following changes resulting from the business
transactions as follows:
VALUE RECEIVED (VR)
=
VALUE PARTED (VP)
Increase ASSET
=
Increase (owners) Capital
Increase ASSET
=
Decrease ASSET
Increase ASSET
=
Increase LIABILITIES
Decrease LIABILITIES
=
Decrease ASSET
Decrease LIABILITIES
=
Increase LIABILITIES
Decrease (owners) Capital
=
Decrease ASSET
Increase EXPENSE
=
Decrease ASSET
Increase ASSET
=
Increase INCOME
Debits and Credits
As learned, different business transactions makes the
bookkeeping values increase and decrease. Another way to
record transactions is through the use of the T-account
The T-account is an accounting device used to summarize the
increases and decreases in the assets, liabilities, capital,
drawing, income/revenues and expenses of the business
(Chua et al, 2005)
ACCOUNT TITLE BOOKKEEPING EQUATION
VALUE RECEIVED VALUE PARTED ASSETS LIABILITIES
EXPENSES CAPITAL
DRAWING INCOME
RULES OF DEBIT AND CREDIT AND NORMAL BALANCES
The table summarizes the rules applied on debit and
credit of each Bookkeeping Element and their normal
balances.
DEBIT
CREDIT
NORMAL BALANCE
ASSET + - DEBIT
EXPENSES + - DEBIT
DRAWING + - DEBIT
LIABILITIES - + CREDIT
CAPITAL - + CREDIT
INCOME - + CREDIT
Mayna Tutunan started a new business and completed the ff. transactions
Aug. 1 Mayna Tutunan invested P 48,000 cash in business.
1 Rented office space and paid P 8,000 cash for the August rent.
3 Purchased exploration equipmetn for P 22,000 by paying P 12,000 cash and
the balance after one month.
5 Purchased office supplies by paying P 1,500
6 Completed exploration work and collected P 4,200 cash for the work.
8 Purchased P 13,500 of office equipment on credit.
15 Completed exploration work on credit in the amount of P 8,000
18 Purchased P 800 of office supplies on credit
20 Paid cash for the office equipment purchased on Aug. 8
24 Billed a client for work completed, P 2,400
28 Received cash for work completed on Aug. 15
30 Paid P 340 cash for this month’s utility bill
30 Mayna Tutunan withdrew P 1,050 cash from the business for personal use.
Required:
1. Prepare a journal entry of the transactions above.
2. Identify the effects of each transaction on the accounts in the accounting
equation.
ACCOUNTING CYCLE
The accounting cycle presents different procedures done to
identify and process business transaction for a given time
frame. The following are the procedures that need to be done
in CHRONOLOGICAL ORDER:
1. JOURNALIZING
2. POSTING
3. PREPARING THE TRIAL BALANCE
4. ADJUSTING ENTRIES
5. FINANCIAL STATEMENTS
6. CLOSING ENTRIES
7. POST-CLOSING TRIAL BALANCE
8. REVERSING ENTRIES
1. JOURNALIZING - the process of chronologically
recording of transactions in the form of journal entries
using the journal notebooks.
2. POSTING - transferring the debit and credit entries
from the journal to the general ledger
3. PREPARING THE TRIAL BALANCE - a trial balance
is a list of balances of all accounts in the order which
they appear in the ledger
4. ADJUSTING ENTRIES - journal entries made to
update the balances of some accounts
5. FINANCIAL STATEMENTS - the final outcome the
accounting process. Examples are the Balance Sheet,
Income Statement and Capital Statement
6. CLOSING ENTRIES - entries made at the end of the
accounting process to close certain accounts.
7. POST-CLOSING TRIAL BALANCE - a trial balance
used to check the correctness of closing entries made.
8. REVERSING ENTRIES - opposite to closing entries,
this are entries made to reverse certain adjusting entries
when the new accounting period begins.
Journalizing - the process of chronologically
recording transactions (evidence by business
documents) in the journals in the form of journal
entries.
To clearly understand journalizing, one is to be introduced
with the following terms:
JOURNAL - the book of original entries
JOURNAL ENTRY - a complete analysis of the effects
of a business transaction as expressed in terms of debit
and credit.
Two Kinds of Journal Entry:
SINGLE ENTRY - entry which only has one debit and
credit.
COMPOUND ENTRY - an entry which could have two or
more debits and credits.
Importance of Journalizing:
Provides a permanent record
Easy access to accounting data since everything is
written chronologically
The process of posting will be easier
In information of transactions is well explained to the
readers.
Parts of a Two-Column General Journal
Using a2-column journal notebook, the different parts are
identified:
Date - when the transaction is recorded. The year, month and
date is placed in this column.
Description - where the account titles are recorded and a brief
description of the transaction.
PR or Posting Reference - indicates the number of the account
where the accounting data are posted.
Debit (Column 1) - money column to record the Debit amount.
Credit (Column 2) - money column to record the Credit
amount.
STEPS IN JOURNALIZING
1. Record the DATE: include the MONTH, DAY and YEAR
2. Accounts DEBITED (or on the DEBIT) are to be written
at the EXTREME LEFT at the Description Column.
3. Accounts CREDITED (or on the CREDIT) is to be
written on the following with AN INDENTION TO THE
RIGHT OF THE ACCOUNTS DEBITED.
4. The EXPLANATION is written below the last account
credited. CREDIT and EXPLANATION are ALIGNED.
5. All EXPLANATIONS begin with the statement of TO
RECORD...
HOW MANY MONTHS?
_______ (FROM DOE-EOTY)
6. After every transaction, leave a SPACE
7. PR COLUMN is used to POSTING ONLY (when
journalizing, do not fill up!)
8. Amounts are placed in the MONEY COLUMNS
9. Follow proper alignment of amounts according to its
1s, 10s, 100s, 1000s etc.
11. Make sure that the debit columns always equal the
credit columns. Remember the Accounting Equation.
PROBLEM:
1. Mr.Boyd on August 1, 2021 invested P200,000 cash
to operate Boyd Computer rental.
2. Mr. Boyd bought in cash two personal computers at
P25,000
3. Mr. Boyd purchased on account P1,900 worth of
bond papers from AC Products and 6,000 worth of
furniture from YZ Furnishing.
4. Mr. Boyd paid in advance three months rent for the
space occupied by his shop at P1,500 per month.
5. Mr. Boyd paid part of his supplies account with AC
Products, P 1,000
6. Mr. Boyd could not pay the furniture account on the
promised date. He informed YZ Furnishing of this and
issued a promissory note for an extension of his debt.
7. Mr. Boyd withdrew P400 cash for enrollment of his
kids.
8. For the month of August, Mr. Boyd received a cash
amount of P8,250 for professional fees rendered by his
technicians.
9. Mr. Boyd paid salaries of his employees, P2,900
10.At the end of the month, Mr. Boyd paid the following
utilities - telephone bill, P280; light and water, P600.
1. Mr.Boyd on August 1, 2021 invested P200,000
cash to operate Boyd Computer rental.
DATE PARTICULARS
PR
DEBIT
CREDIT
08/01/21
Cash
200,000
Mr. Boyd, Capital
200,000
To record
Mr. Boyd investement
to operate Boyd Computer Rental
2. Mr. Boyd bought in cash two personal computers
at P25,000
DATE PARTICULARS
PR
DEBIT
CREDIT
2
Office Equipment
25,000
Cash
25,000
To record
purchased two
personal computers
3. Mr. Boyd purchased on account P1,900 worth
of bond papers from AC Products and 6,000
worth of furniture from YZ Furnishing.
DATE PARTICULARS
PR
DEBIT
CREDIT
3
Supplies
1,900
Furniture and Fixtures
6,000
Accounts Payable
-AC Prod.
1,900
Accounts Payable
- YZ Furnishing
6,000
To record purchased on account to
AC Products and YZ Furnishing
4. Mr. Boyd paid in advance three months rent for
the space occupied by his shop at P1,500 per
month.
DATE PARTICULARS
PR
DEBIT
CREDIT
4
Prepaid Rent
4,500
Cash
4,500
To record advance payment for 3
month rent
5. Mr. Boyd paid part of his supplies account with
AC Products, P 1,000
DATE PARTICULARS
PR
DEBIT
CREDIT
5
Accounts Payable
-AC Prod.
1,000
Cash
1,000
To record initial payment of
supplies on account to AC
Products
6. Mr. Boyd could not pay the furniture account
on the promised date. He informed YZ Furnishing
of this and issued a promissory note for an
extension of his debt.
DATE PARTICULARS
PR
DEBIT
CREDIT
6
Accounts Payable
-YZ
Furnishing
6,000
Notes Payable
-YZ
Furnishing
6,000
To record issued promissory note
for an extension of debt to YZ
Furnishing
7. Mr. Boyd withdrew P400 cash for enrollment of
his kids.
DATE PARTICULARS
PR
DEBIT
CREDIT
7
Mr. Boyd, Drawing
400
Cash
400
To record Mr. Boyd withdrawal
8. For the month of August, Mr. Boyd received a
cash amount of P8,250 for professional fees
rendered by his technicians.
DATE PARTICULARS
PR
DEBIT
CREDIT
8
Cash
8,250
Professional Fees
8,250
To record professional fees
rendered
9. Mr. Boyd paid salaries of his employees,
P2,900
DATE PARTICULARS
PR
DEBIT
CREDIT
9
Salaries Expense
2,900
Cash
2,900
To record paid salaries of
employees
10. At the end of the month, Mr. Boyd paid the
following utilities - telephone bill, P280; light and
water, P600.
DATE PARTICULARS
PR
DEBIT
CREDIT
10
Utilities Expense
- telephone
280
Utilities Expense
-
light & water
600
Cash
880
To record paid utilities at the end
of the month
POSTING - the process of transferring the debit and
credit entries from the journal to the general ledger.
Posting is done with the use of the following:
LEDGER - the book of final entry.
it provides the classification of accounts since accounts
are arranged as to ASSETS, LIABILITIES, OWNER’S
EQUITY, REVENUE AND EXPENSES. It also provides
balance of each account.
CHART OF ACCOUNTS - a list of assets, liabilities, owners
equity, revenues and expenses with their corresponding
account numbers which are needed by the business in its
day-to-day transactions.
Classification of Accounts in the Ledger
1. REAL ACCOUNTS- are accounts that affect assets,
liabilities and owners capital. These accounts are
deemed important to the business.
2. NOMINAL ACCOUNTS- are accounts that affect
income and expenses. Are also known as temporary
accounts and are closed at the end of the year (see
closing entries)
3. MIXED ACCOUNT - those which have elements of
both real and nominal accounts. Examples are
prepaid expenses, and unearned income (see
Adjusting entries)
Parts of the General Ledger
The following are identified in the ledger:
TITLE - the heading or the name of the account
ACCOUNT NUMBER - it is written at the top right hand
of the ledger.
DATE - it includes the year, month and day of the
journal entries to be posted.
FOLIO/POSTING REFERENCE - indicates the sources
of entries or the page of the general journal and special
journals.
DEBIT AND CREDIT COLUMNS - the money columns
where the amounts are being places/posted.
Format of the General Ledger
CASH #100
DATE ITEM PR DEBIT DATE ITEM PR CREDIT
STEPS FOR POSTING:
1. Make a LEDGER for every account
2. Label ACCOUNT NUMBERS to the account PROPERLY
based on the Chart of Accounts given.
3. POST by DATE
GENERAL PRINCIPLE
Post DEBITS to DEBITS and CREDITS to CREDITS
4. For the JOURNALS - write the proper ACCOUNT
NUMBER on the PR column for every account posted
5. On the GENERAL LEDGER - indicate the PAGE NUMBER
where you taken the amount in the PR column.
6. REPEAT until DONE.
TRIAL BALANCE
-a list of accounts with open balances in the
general ledger.
- It serves as a tool to determine the equality of
the debits and the credits in all the ledgers.
STEPS IN TRIAL BALANCE PREPARATION
1. Write the heading of the trial balance. It should include the following:
The name of the business - ABM Store
Trial Balance -Trial Balance
MM DD, YYYY - June 30, 2010
2. Provide a column for the accounts and two money columns for debit
and credit balances.
3. Accounts should be written starting from Assets, Liabilities, Capital,
Revenues and Expenses last. Look at the Chart of accounts to see
exact order of account titles.
4. Write the amount/balances opposite the accounts under debit and
credit columns.
5. Foot the debit and credit columns and double rule. Remember, they
should be in balance
SAMPLE FORMAT USING JOURNAL NOTEBOOK
ABM Strand Studio
Trial Balance
March 31, 20XX
ACCOUNT TITLES
PR
DEBIT CREDIT
Cash
16,000
Accoun
ts
Receivable
2,000
Supplies
500
Accounts Payable
4,000
Salaries Payable
1,000
Ms. ABM, Capital
10,000
Ms. ABM, Drawing
2,000
Service Income
20,000
Rent Expense
7,000
Interest Expense
7,000
Utilities Expense
500
_______
TOTAL
35,000
35,000
ADJUSTING ENTRIES
are journal entries made at the end of the accounting
period to update the balances of some accounts.
present financial data more fairly and accurately
especially the results of operations and financial
condition of the business.
TYPES OF ADJUSTING ENTRIES
1. DEFERRALS
Prepaid Expenses
Unearned Income
2. ACCRUALS
3. DEPRECIATION
TYPES OF ADJUSTING ENTRIES
1. DEFERRALS -is the postponement of the recognition of an expenses
already paid or revenue already received.
Prepaid Expenses - adjusting entries to take up used cost as asset
and unused cost as expense.
Unearned Income - adjusting entries to take up earned revenue as
income and unearned revenue as liability.
2. ACCRUALS - is the expense or revenue that gradually increases with
the passage of time.
Accrued Expense - adjusting entries to take up expenses already
incurred but not yet recorded.
Accrued Income - adjusting entries to take up income already
earned but not yet recorded.
3. DEPRECIATION - is the cost allocated to the asset over the estimated
useful life.
TWO METHODS OF RECORDING PREPAID EXPENSES
ASSET METHOD
on the date of entry, the ASSET account is identified
and DEBITED.
on the end of the year, the USED portion is recorded
EXPENSE METHOD
on the date of entry, the EXPENSE account was
identified and DEBITED.
on the end of the year, the UNUSED portion is
recorded
JOURNAL ENTRY USING ASSET METHOD
DATE ACCOUNT TITLES
PR
DEBIT
CREDIT
20 _
(DATE)
Prepaid _________
XXXX
Cash
XXXX
To record advance
payment of ____________
DATE ACCOUNT TITLES
PR
DEBIT
CREDIT
20 _
DEC.
31
______ Expenses
XXXX
Prepaid ______
XXXX
To record USED
portion of ____________
END OF
THE YEAR
DATE OF
ENTRY
JOURNAL ENTRY USING EXPENSE METHOD
DATE ACCOUNT TITLES
PR
DEBIT CREDIT
20 _
(DATE)
_________ Expense
XXXX
Cash
XXXX
To record advance
payment of ____________
DATE ACCOUNT TITLES PR DEBIT CREDIT
20 _
DEC.
31
Prepaid
______
XXXX
______ Expense
XXXX
To record UNUSED
portion of ____________
DATE OF
ENTRY
END OF
THE YEAR
Tips in Analyzing Deferrals
(Prepaid Expenses & Unearned Income)
1. Identify what account is being tackled in each adjustment.
2. Count the number of months from the Date of Entry until
December 31, of the current year, to determine the months
already USED/EARNED.
If DOE is at the beginning of the month, include the month
in counting (Ex. Jan. 1, May 2, July 1......)
If DOE is at the middle or ending days, count the next
month as your 1st month USED/EARNED (Ex. Jun. 30, Aug.
15, Feb. 29...)
3. Before considering the different portions used/earned,
determine the duration of the said payment.
PROBLEMS:
Prepare the appropriate adjusting entry for each transaction. Show both
ASSET and EXPENSE METHOD
1. On March 1, 2020, Ms. M. Quu paid P1,200 representing one-year for
office space.
2. Office supplies costing P1,200 were bought on December 1 2010 and
December 31, 2020 of the same year only P500 were used.
3. Ms. Venus paid, in advance, a 5-year contract of rent for a building she
will be using. Payment was made on June 30, 2019.
ANALYSIS:
Date of Entry: _____________________
End of the Year: _____________________
Duration of Payment: ________________FOR ONE YEAR
Account: ASSET : ________________USED
EXPENSE: ________________UNUSED
HOW MANY MONTHS?
_______ (FROM DOE-EOTY)
UNEARNED INCOME
An account that has qualities of a LIABILITY and an
INCOME. Classified as MIXED ACCOUNT.
Are services that have been paid for by the customer
but business has an obligation to render service.
Examples of these are unearned rent, unearned
subscription, unearned service fees, etc.....
TWO METHODS OF RECORDING
UNEARNED REVENUES
LIABILITY METHOD
when at the time cash is received, a LIABILITY account
was recognized and CREDITTED
at the end of the year, the EARNED portion is recorded
INCOME METHOD
when at the time cash is received, an INCOME account
was recognized and CREDITTED.
at the end of the year, the UNEARNED portion is
recorded.
JOURNAL ENTRY USING LIABILITY METHOD
DATE ACCOUNT TITLES
PR
DEBIT CREDIT
20 _
(DATE)
Cash
XXXX
Unearned __________ XXXX
To record advance
collection of __________
DATE ACCOUNT TITLES P
R
DEBIT CREDIT
20 _
DEC.
31
Unearned __________
XXXX
____________ Income XXXX
To record EARNED
portion of __________
DATE OF
ENTRY
END OF
THE YEAR
JOURNAL ENTRY USING INCOME METHOD
DATE ACCOUNT TITLES
PR
DEBIT CREDIT
20 _
(DATE)
Cash
XXXX
__________ Income XXXX
To record advance
collection of __________
DATE ACCOUNT TITLES
PR
DEBIT CREDIT
20 _
DEC.
31
__________ Income
XXXX
Unearned __________ XXXX
To record UNEARNED
portion of __________
DATE OF
ENTRY
END OF
THE YEAR
POINTS TO CONSIDER
1. Use this LOGIC for DEFERRALS...
USED = EARNED
UNUSED = UNEARNED
... Does it make sense?
2. Use the same way of analysis as Prepaid Expenses!
PROBLEMS
Prepare the appropriate adjusting entry for each transaction.
Show both LIABILITY and INCOME METHOD
1. On April 1, 2019, Menzi Corporation received P1,500 from Mr. P. Ping, for
a one-year subscription.
2. On December 1, 2016, Mr. A. Daval received P18,000 representing six
months rental for office space, from Mr. Sagal.
3. On September 2009, ABC Dentistry received P100,000 from Ms. Olivia for
dentistry service good for 5 months.
ANALYSIS:
Date of Entry: _____________________
End of the Year: _____________________
Duration of Payment: ________________FOR ONE YEAR
Account: INCOME : ________________UNEARNED
LIABILITY: ________________ EARNED
HOW MANY MONTHS?
_______ (FROM DOE-EOTY)
ACCRUED EXPENSES
Are expenses already incurred but not yet paid. Since
these expenses have not been paid, they are
considered as a LIABILITY for the period.
For these adjustments the date of entry is not
necessary for they don’t give any effect when the
adjusting entries are prepared.
Examples of these transactions are on interest,
salaries,wages, etc.
JOURNAL ENTRY FOR ACCRUED EXPENSES
DATE ACCOUNT TITLES PR DEBIT CREDIT
20___
DEC. 31
__________________ Expenses
P ________
______________________ Payable P ________
To record UNPAID ______________
END OF THE YEAR
TECHNIQUES TO SOLVE INTEREST
To solve for INTEREST Problem use this formula:
Where : I = Interest
P = Principal Amount
R = Rate (%)
T = # of months until Dec. 31
12 months
PROBLEMS
Prepare the appropriate adjusting entry for each transaction
using this formula (I=Prt)
1. On November 1, 2009, Bella Tanga issued a 12% - 3 months, P20,000
promissory note of the following year.
2. Mrs. Himaya borrowed money from Mr. Chakra on January 1, 2020. The
promissory note bared an interest of 15% - payable within 2 years for an
amount of P300,000.
ANALYSIS:
Date of Entry :_____________________
End of the Year :_____________________
Principal Amount:_____________________
Rate :_____________________
HOW MANY MONTHS?
_______ (FROM DOE-EOTY)
DEPRECIATION ACCOUNTING
It is the process of allocating the cost of plant assets over
their estimated useful life, except of land.
FORMULA FOR COMPUTING YEARLY DEPRECIATION USING
STRAIGHT LINE METHOD
Yearly Depreciation = Cost - Salvage Value
Estimated Useful Life
Where:
Cost = original cost of plant asset when acquired
Salvage or Scrap Value = estimated amount the asset can
be sold at the end of its useful life
Estimated Useful Life = number of years one can expect to
benefir from the use of the plant asset
JOURNAL ENTRY FOR DEPRECIATION
DATE ACCOUNT TITLES PR DEBIT CREDIT
20__
DEC.
31
Depreciation Expense
- (ASSET) P xxxxx
Accumulated Depreciation - (ASSET) P xxxxx
To record depreciation of (ASSET)
REVIEW OF TERMS:
Depreciation Expense - allocated cost of fixed assets in a
current period
Accumulated Depreciation - a contra-asset account that
aids in determining the net worth of business, assets.
PROBLEMS
Prepare the appropriate adjusting entry for each transaction
1. On January 2, 2019, the ABC Co. bought tables and chairs for
their office with the total amount of P12,000. Estimated useful life
is five years at the end of which assets can be sold for P 2,500.
2. Construction for building costing P 60,000 was completed on
October 31.It has an estimated usability of 40 years with no
salvage value.
3. Office furniture acquired on January 1 of the current year at a
cost of P10,000 is expected to be useful for 3 years and has a
scrap value of P 1,000.
4. Acar bought on October 1 of the current year at a cost of P
240,000 is expected to be useful for 5 years and has no salvage
value.
5. Office furniture was bought for P50,000 on May 31 of the
current year. It is expected to be useful for 7 years and has a
salvage value of P8,000.
ANALYSIS:
Date of Entry :___________
End of the Year :___________
Type of Asset :___________ Salvage Value: ______
Cost :___________ Est. Useful Life: _____
HOW MANY MONTHS?
_______ (FROM DOE-EOTY)
WORKSHEET
A working paper used by ACCOUNTANTS &
BOOKKEEPERS.
May be prepared in 6, 8, or 10 columns
PURPOSES OF THE WORKSHEET
1. ASSIST for easier preparation of financial statements
2. Quickly arrive at adjusted balances of accounts
3. Show FINANCIAL POSITION & RESULTS from
OPERATIONS
4. REDUCES Risk of OMITTING accounting data
5. DETAILED & ACCURATE work.
PARTS OF THE WORKSHEET
A. HEADER
Written at the CENTER of the worksheet
FORMAT:
Name of BUSINESS -ABM Store
Worksheet -Worksheet
December 31, YYYY -December 31, 2019
B. BODY
Contains COLUMNS where all AMOUNTS are placed
The following are placed in the 10-column worksheet:
Trial Balance : column 1 & 2
Adjustments : column 3 & 4
Adjusted Trial Balance : column 5 & 6
ADJUSTMENTS:
Where all adjusting entries are placed
Needed to update the TRIAL BALANCE
Need to make Financial Statement more accurate and
properly presented
NEW ACCOUNTS not found in the Trial Balance are ADDED
ADJUSTED TRIAL BALANCE:
Shows the RESULTING BALANCE after the effect of
ADJUSTMENTS columns
Used as basis in preparing the different financial statement
for assessment and planning of business operations
FORMAT OF A 6-COLUMN WORKSHEET
Galileo’s Surfing Center
Worksheet
December 31, 2017
ACCOUNT TITLES TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
(1) (2) (3) (4) (5) (6)
STEPS IN PREPARING A SIX-COLUMN
WORKSHEET
1. Writing the HEADER
Locate the center of the whole worksheet
At the top of center point of the columnar
paper, write the contents needed.
2. Writing the BODY
Write the following column headings starting from
columns 1 until 10
TRIAL BALANCE
Copy the account titles and their corresponding
amounts under the Trial Balance.
ADJUSTMENTS
Prepare the needed adjustments identify
Enter the adjusting entries identified in the
Adjustments columns. If account is not on the list of
accounts, add such account below the “TOTAL” in the
description columns.
ADJUSTED TRIAL BALANCE
Compare the Trial Balance columns from the Adjustment
columns
Extract the adjusted balance of accounts that were adjusted
following this rule:
Add :
Debit entry and the Debit Adjustment
Credit entry and the Credit Adjustment
Subtract:
Debit entry and the Credit Adjustment
Credit entry and the Debit Adjustment
Pencil Foot the debit and credit columns of the Adjusted Trial
Balance for a new TOTAL
PROBLEM
Using a 6-column worksheet, present the following
1. Trial Balance
2. Adjusting Entries
3. Adjusted Trial Balance
Quality Man Power
TRIAL BALANCE
December 31, 2020
ACCOUNT TITLES DEBIT CREDIT
(1) (2)
Cash
38,500
Accounts Receivable
54,500
Notes Receivable
95,000
Supplies
36,000
Store Supplies
30,000
Towing Truck
350,000
Notes Payable
64,500
Saturnah, Capital
279,000
Zaturnah, Drawing
50,000
Repair Income
450,000
Advertising Expense
14,500
Rent Expense
15,000
Salaries Expense
98,000
Utilities Expense
12,000
_______
TOTAL
793,500
793,500
Quality Man Power
TRIAL BALANCE
December 31, 2020
DATA FOR ADJUSTMENTS:
a. Depreciation of towing truch amounts to
P125,000
b. Unearned service income amounts to P50,000
(INCOME METHOD
c. Unpaid utilities amounts to P3,500
d. Unused advertising amounts to P500
(EXPENSE METHOD)
ADJUSTING JOURNAL ENTRIES
DATE PARTICULARS PR DEBIT CREDIT
a.
Depreciation Expenses-Towing Truck
125,000.00
Accumulated Depreciation - Towing Truck
125,000.00
To record depreciation of Towing truck
b.
Service Income
50,000.00
Unearned Service/Repair Income
50,000.00
To record unearned portion of service income
c.
Utilities Expense
3,500.00
Accrued Utilities Payable
3,500.00
To record unpaid utilities expenses
d.
Prepaid advertisement
500.00
Advertising Expenses 500.00
TOTAL
179,000.00
179,000.00
Cash 38,500.00
38,500.00 -
Accounts Receivable 54,500.00
54,500.00 -
Notes Receivable 95,000.00
95,000.00 -
Supplies 36,000.00
36,000.00 -
Store Supplies 30,000.00
30,000.00 -
Towing Truck 350,000.00
350,000.00 -
Accumulated Depreciation - Towing truck 125,000.00 - 125,000.00
Notes Payable 64,500.00
- 64,500.00
Unearned Repair/Service Income 50,000.00 - 50,000.00
Accrued Utilities Payable 3,500.00 - 3,500.00
Saturnah, Capital 279,000.00
- 279,000.00
Zaturnah, Drawing 50,000.00
50,000.00 -
Repair/Service Income 450,000.00
PARTICULARS PR TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
50,000.00 400,000.00
Advertising Expense 14,500.00
500.00 14,000.00
Rent Expense 15,000.00
15,000.00 -
Salaries Expense 98,000.00
98,000.00 -
Utilities Expense 12,000.00
3,500.00 15,500.00
TOTAL
Depreciation Expense - Towing truck 125,000.00 125,000.00 -
Prepaid Advertising 500.00 500.00 -
793,500.00
793,500.00
179,000.00
179,000.00
922,000.00
922,000.00
Cash 38,500.00 -
Accounts Receivable 54,500.00 -
Notes Receivable 95,000.00 -
Supplies 36,000.00 -
Store Supplies 30,000.00 -
Towing Truck 350,000.00 -
Accumulated Depreciation - Towing truck - 125,000.00
Notes Payable - 64,500.00
Unearned Repair/Service Income - 50,000.00
Accrued Utilities Payable - 3,500.00
Saturnah, Capital - 279,000.00
Zaturnah, Drawing 50,000.00 -
Repair/Service Income 400,000.00
Advertising Expense 14,000.00
Rent Expense 15,000.00 -
Salaries Expense 98,000.00
PARTICULARS ADJUSTED TRIAL
BALANCE
DEBIT CREDIT
-
Utilities Expense 15,500.00
TOTAL
Depreciation Expense - Towing truck 125,000.00 -
Prepaid Advertising 500.00 -
922,000.00
922,000.00
Cash 38,500.00 -
Accounts Receivable 54,500.00 -
Notes Receivable 95,000.00 -
Supplies 36,000.00 -
Store Supplies 30,000.00 -
Towing Truck 350,000.00 -
Accumulated Depreciation - Towing truck - 125,000.00 -
Notes Payable - 64,500.00
Unearned Repair/Service Income - 50,000.00 -
Accrued Utilities Payable - 3,500.00 -
Saturnah, Capital - 279,000.00
Zaturnah, Drawing 50,000.00 -
Repair/Service Income 400,000.00 - 400,000.00
Advertising Expense 14,000.00 14,000.00 -
Rent Expense 15,000.00 - 15,000.00 -
Salaries Expense 98,000.00 - 98,000.00 -
Utilities Expense 15,500.00 15,500.00 -
TOTAL - -
Depreciation Expense - Towing truck 125,000.00 - 125,000.00 -
Prepaid Advertising 500.00 - 500.00
PARTICULARS ADJUSTED TRIAL
BALANCE
INCOME STATEMENT
DEBIT CREDIT DEBIT CREDIT
-
268,000.00 400,000.00
NET INCOME
922,000.00
922,000.00
132,000.00
Cash 38,500.00 - 38,500.00
Accounts Receivable 54,500.00 - 54,500.00
Notes Receivable 95,000.00 - 95,000.00
Supplies 36,000.00 - 36,000.00
Store Supplies 30,000.00 - 30,000.00
Towing Truck 350,000.00 - 350,000.00
Accumulated Depreciation - Towing truck - 125,000.00 -125,000.00
Notes Payable - 64,500.00 - 64,500.00
Unearned Repair/Service Income - 50,000.00 50,000.00
Accrued Utilities Payable - 3,500.00 3,500.00
Saturnah, Capital - 279,000.00 -
PARTICULARS ADJUSTED TRIAL
BALANCE
BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT
279,000.00
Zaturnah, Drawing 50,000.00 - - 50,000.00
Repair/Service Income 400,000.00
Advertising Expense 14,000.00
Rent Expense 15,000.00 -
Salaries Expense 98,000.00 -
Utilities Expense 15,500.00
TOTAL
Depreciation Expense - Towing truck 125,000.00 -
Prepaid Advertising 500.00 -
479,000.00 347,000.00
NET INC. 132,000.00
922,000.00
922,000.00
479,000.00
479,000.00
Cash 38,500.00 - 38,500.00
Accounts Receivable 54,500.00 - 54,500.00
Notes Receivable 95,000.00 - 95,000.00
Supplies 36,000.00 - 36,000.00
Store Supplies 30,000.00 - 30,000.00
Towing Truck 350,000.00 - 350,000.00
Accumulated Depreciation - Towing truck - 125,000.00 - -125,000.00
Notes Payable - 64,500.00 - 64,500.00
Unearned Repair/Service Income - 50,000.00 - 50,000.00
Accrued Utilities Payable - 3,500.00 - 3,500.00
Saturnah, Capital - 279,000.00 - 279,000.00
Zaturnah, Drawing 50,000.00 - - 50,000.00
Repair/Service Income 400,000.00 - 400,000.00
Advertising Expense 14,000.00 14,000.00 -
Rent Expense 15,000.00 - 15,000.00 -
Salaries Expense 98,000.00 - 98,000.00 -
Utilities Expense 15,500.00 15,500.00 -
TOTAL - -
Depreciation Expense - Towing truck 125,000.00
PARTICULARS ADJUSTED TRIAL
BALANCE
INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
- 125,000.00 -
Prepaid Advertising 500.00 - 500.00 -
268,000.00 400,000.00
NET INCOME 479,000.00 347,000.00
NET INC. 132,000.00
922,000.00
922,000.00
132,000.00
479,000.00
479,000.00
Cash 38,500.00
38,500.00 - 38,500.00
Accounts Receivable 54,500.00
54,500.00 - 54,500.00
Notes Receivable 95,000.00
95,000.00 - 95,000.00
Supplies 36,000.00
36,000.00 - 36,000.00
Store Supplies 30,000.00
30,000.00 - 30,000.00
Towing Truck 350,000.00
350,000.00 - 350,000.00
Accumulated Depreciation - Towing truck 125,000.00 - 125,000.00 - -125,000.00
Notes Payable 64,500.00
- 64,500.00 - 64,500.00
Unearned Repair/Service Income 50,000.00 - 50,000.00 - 50,000.00
Accrued Utilities Payable 3,500.00 - 3,500.00 - 3,500.00
Saturnah, Capital 279,000.00
- 279,000.00 - 279,000.00
Zaturnah, Drawing 50,000.00
50,000.00 - - 50,000.00
Repair/Service Income 450,000.00
50,000.00 400,000.00 - 400,000.00
Advertising Expense 14,500.00
500.00 14,000.00 14,000.00 -
Rent Expense 15,000.00
15,000.00 - 15,000.00 -
Salaries Expense 98,000.00
98,000.00 - 98,000.00 -
Utilities Expense 12,000.00
3,500.00 15,500.00 15,500.00 -
TOTAL - -
Depreciation Expense - Towing truck 125,000.00 125,000.00 - 125,000.00 -
Prepaid Advertising 500.00 500.00 - 500.00
ABM COMPANY
10 COLUMN WORKSHEET
Date: ___________________
PARTICULARS PR TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
-
268,000.00 400,000.00
NET INCOME 479,000.00 347,000.00
NET INC. 132,000.00
793,500.00
793,500.00
179,000.00
179,000.00
922,000.00
922,000.00
132,000.00
479,000.00
479,000.00
EVALUATION/ASSIGNMENT
First Class Resto-Bar
Adjusted Trial Balance
December 31, 2017
ACCOUNT TITLES
DEBIT CREDIT
Cash
16,000
Accounts Receivable
2,000
Supplies
500
Accounts Payable
4,000
Salaries Payable
1,000
Mr. Dee, Capital
10,000
Mr. Dee, Drawing
2,000
Service Income
20,000
Rent Expense
7,000
Interest Expense
7,000
Utilities Expense
500
____
TOTAL
35,000
35,000
FINANCIAL STATEMENTS -considered as the “final
results” of the business in an accounting cycle. Presents
the “success” and current standing of a business.
INCOME STATEMENT
shows the result of business operations on a given duration
in the accounting cycle.
only income and expenses are shown in these statement
identifies how much income was earned by the business and
how much expenses were incurred.
The result of operation; difference of the income from
expenses may be net income or net loss
CAPITAL STATEMENT
changes in the owner equity account of a business entity are
reflected.
Accounts that affect owners equity are capital, drawing, net
income or loss based in the results of the Income Statement
BALANCE SHEET
presents the assets, liabilities and owners capital in a given
duration.
Gives an idea of the financial position of the business.
Only assets, liabilities, capital (based in the Capital
Statement) are presented.
Assignment:
Cash 38,500.00 -
Accounts Receivable 54,500.00 -
Notes Receivable 95,000.00 -
Supplies 36,000.00 -
Store Supplies 30,000.00 -
Towing Truck 350,000.00 -
Accumulated Depreciation - Towing truck - 125,000.00
Notes Payable - 64,500.00
Unearned Repair/Service Income - 50,000.00
Accrued Utilities Payable - 3,500.00
Saturnah, Capital - 279,000.00
Zaturnah, Drawing 50,000.00 -
Repair/Service Income 400,000.00
Advertising Expense 14,000.00
Rent Expense 15,000.00 -
Salaries Expense 98,000.00
PARTICULARS PR ADJUSTED TRIAL
BALANCE
DEBIT CREDIT
-
Utilities Expense 15,500.00
TOTAL
Depreciation Expense - Towing truck 125,000.00 -
Prepaid Advertising 500.00 -
922,000.00
922,000.00
INCOME STATEMENT
First Class Resto-Bar
INCOME STATEMENT
For the year ended, December 31, 2017
Service Income
20,000
Less: Rent Expense
7,000
Interest Expense
7,000
Utilities Expense
500
TOTAL EXPENSES
14,500
NET INCOME (Loss)
5,500
CAPITAL STATEMENT
First Class Resto-Bar
CAPITAL STATEMENT
For the year ended, December 31, 2017
Mr. Dee, Capital
10,000
Net Income
5,500
Mr. Dee, Drawing
2,000
INCREASE IN CAPITAL
3,500
Mr. Dee, Capital as of Dec. 31, 2017
13,500
BALANCE SHEET
First Class Resto-Bar
BALANCE SHEET
December 31, 2017
ASSETS:
Cash
16,000
Accounts Receivable
2,000
Supplies
500
TOTAL ASSETS
18,500
LIABILITIES:
Accounts Payable
4,000
Salaries Payable
1,000
TOTAL LIABILITIES
5,000
OWNER’S CAPITAL
Mr. Dee, Capital as of Dec. 31, 2017
13,500
TOTAL LIABILITIES AND OWNER’S EQUITY
18.500
PROBLEM
V. Jaro Party Club
Adjusted Trial Balance
December 21, 2019
ACCOUNT TITLES DEBIT CREDIT
Cash
100,000
Accounts Payable
2,100
V. Jaro, Capital
55,000
V. Jaro, Drawing
18,000
Service Income
78,000
Interest Income
1,500
Salaries Expense
13,000
Utilities Expense
4,000
Rent Expense
1,600
_______
TOTAL
136,600
136,600
FINANCIAL RATIOS - a method of calculating,
analyzing and monitoring business’ performance using
the business’ financial statement.
USES AND IMPORTANCE
1. Understand the meaning of the Financial statement
of the business.
2. Facilitate comparisons performance over the years
and across companies
3. Measures business relationship of COST with
BENEFITS
4. Aids in the decision-making process of the business,
through identify financial strengths and weaknesses.
UNDERSTAND THE RATIOS
TIME SERIES ANALYSIS
Comparing business ratios over time
Provides historical trends and variability over time
Show economic conditions
CROSS SECTIONAL ANALYSIS
Comparing with related business
Common approach : comparing through the industry
average
Industry Average - a “benchmark” used by business to
measure their performances on certain area.
KINDS OF F/S ANALYSIS
QUICK/ACID TEST
Measures how fast assets are converted into cash
Shows how “liquid” the business is
Desirable Ratio = 1:1 (P1 of assets can cover P1 of
liabilities)
FORMULA:
QUICK/ACID TEST
Cash+Accounts Receivable + Notes Receivable
TOTAL LIABILITIES
=
ASSET TURNOVER
Measures overall investment efficiency
Describes relationship between total income and
assets needed to sustain activity of business.
FORMULA:
TOTAL INCOME
TOTAL ASSETS
ASSET TURNOVER =
DEBT RATIO
Shows proportion of all assets that are financeD with
debt
Examines business’ ability to satisfy debt obligations
FORMULA:
TOTAL LIABILITIES
TOTAL ASSET
DEBT RATIO =
NET PROFIT MARGIN
Measures net income vs. revenue
Examines how much percent of net income comes
from total revenue.
FORMULA:
NET INCOME
TOTAL INCOME
NET PROFIT MARGIN =
RETURN ON ASSETS (RoA)
Performance in using assets to generate income
FORMULA:
NET INCOME
TOTAL ASSETS
RoA =
RETURN ON EQUITY (RoE)
Shows how much will be returned to the owner
Needed to see profitability of owners equity
FORMULA:
NET INCOME............
TOTAL OWNERS EQUITY
RoA =
PROBLEM
You prepared the business’ 2020 financial statement and
obtained the ratio values for the years 2019 and 2020
along with the industry ratio. The following were
presented....
Ulala Laundromat
INCOME STATEMENT
For the month ended, December 31, 2020
Service Income
1,371,000
Less: EXPENSES
Salaries Expense
650,000
Utilities Expense
416,000
Supplies Expense
152,000
Rent Expense
93,000
Taxes Expense
24,000
TOTAL Expense
1,335,000
Ulala Laundromat
BALANCE SHEET
December 31, .......
ASSETS 2020 2019
Cash
20,000
24,100
Accout Receivable
805,556
763,900
Office Supplies
700,625
763,445
Office Equipment
1,593,819
1,343,707
TOTAL ASSETS
3,125,000
2,895,152
LIABILITIES 2020 2019
Accounts Payable
230,000
400,500
Notes Payable
1,165,250
470,902
Interest Payable
386,000
700,000
TOTAL LIABILITIES
1,781,250
1,571,402
OWNER’S EQUITY
Ms. Ulala, Capital as of Dec. 31......
1,343,750
2,895,152
COMPUTE THE FOLLOWING:
1. QUICK/ACID TEST (2020)
2. ASSET TURNOVER (2020)
3. DEBT RATIO (2020)
4. NET PROFIT MARGIN (2020)
5. RoA (2020)
6. RoE (2020)
END